Last week I promised good news. This is it. While lecturing to factory managers in Jinan, China in 1995 I invited some of them each night to come to my apartment to discuss their work. While laboriously struggling to make an organization chart of their factories through my interpreter it suddenly dawned on me that there were two management hierarchies in each factory. Every CEO running the factory had a counterpart communist party CEO! I read that there was on each of the former’s desk two telephones, a black one for the guy actually running the place and a red one for his communist party boss.

China

Last week I promised good news. This is it. While lecturing to factory managers in Jinan, China in 1995 I invited some of them each night to come to my apartment to discuss their work. While laboriously struggling to make an organization chart of their factories through my interpreter it suddenly dawned on me that there were two management hierarchies in each factory. Every CEO running the factory had a counterpart communist party CEO! I read that there was on each of the former’s desk two telephones, a black one for the guy actually running the place and a red one for his communist party boss.

In their seminal work on what makes nation’s thrive and fall, the authors concluded that China would initially thrive as their economy recovered from the devastation of the Great Leap Forward and Cultural Revolutions of Mao but would eventually stagnate once they developed a large middle-class. The answer is the insight Joseph Schumpeter provided about the dialectic of productivity e.g., it maketh and it breaketh economies. Each advance in productivity destroys the existing order just as the Model T in 1913-4 cleared the streets of horses.

In an inclusive economy in a free country like the western democracies, it is often heartbreaking, but new technologies can easily displace old ones. This is not possible in China because changes in factory technology that improves productivity would replace the existing ones would be resisted by party officials who were benefiting from existing methods. Party officials live well as parasites on industry, and they will not give up those perquisites easily. Similarly, friends of Putin and his minions in their kleptocracy not only are not skilled enough to run their economy, they like their counter parts in China are skimming off the top. American businesses are merciless in discarding outdated technology but equally open to new methods. That is indeed good news for America.

Fall of the British Empire

Under terms ending WWI, the German navy was to surrender to the British navy Nov.21, 1918 at May Island at the mouth of the Firth of Foy. Then, the British Grand Fleet was the mightiest force in the history of sea warfare holding together the greatest empire since Rome or Genghis Khan on which it was said the sun never set. It ruled 412 million people [23% of the world’s population] and 24% of the earth’s surface [13.7 million square miles].

The British Empire ended in 1968 when the last of the British legions came home. For the first time in three centuries, Great Britain ruled no Empire. They self-destructed from two mutually exclusive values, e.g. democracy and imperialism. “Now there is evidence of a new generation shaking itself free from the imperial dream and finding a new and more realistic goals.” Unhappily, the UK did not respond well. Its basic problem was low productivity—the subject of the previous three parts in this series. [Cross]

The American Dream

For the decade of the thirties, Americans suffered severe economic deprivation, and when WWII made us sing “happy days are here again,” we endured five years of voluntary deprivation to supply the war effort. After fifteen years of delayed gratification, the nation was ready to party when the war ended in August 1945.

When WWII ended America possessed 7% of the world’s population, 42% of its income, and 50% of its manufacturing output. We made 80% of the world’s automobiles and had 75% of the world’s gold. Because of our dominance in world markets, we began a quarter century of sustained growth averaging 5% of GDP yearly--the highest rates in recorded history--and enjoyed the greatest prosperity the world has ever known. [Patterson]

In that “Golden Age” we expanded public entitlement programs on the assumption that the good times would continue. They didn’t. The cost of wars and those social safety net programs in large part caused our twenty trillion dollar national debt. [Cowen,2011]

We entered into long-term obligations when our income was at its peak because of short-term conditions. Our inflated expectations now overwhelm our current level of achievement creating great dissatisfaction.[Cowen, 2013]

Rise of the Rest

The major empires in history fell when development of their former vassal states grew past their own e.g., the “rise of the rest.” They learned that military greatness depends on economic strength. Wars are expensive. Military and economic security are mutually exclusive and nations must choose the balance between them. Thousands of jack-booted troops marching past autocratic dictators do not constitute military strength. Countries are strong because of their economies and must be able to afford their military strength to be truly strong. North Korea and Russia are paper tigers because neither has a strong enough economy to conduct sustained warfare. [Kennedy]

Whether there is good or bad news for America depends on the decisions of leaders in industry and government. Nuclear war is unthinkable because it would poison the atmosphere worldwide and be mutually destructive. It would also be unaffordable for us—sucking the wind out of consumption spending. We cannot go back to unique, non-repeatable conditions. Greatness depends on going forward in peace and increasing productivity.

[ ] Acemoglu, Daron, and James A. Robinson, Why Nations Fail, NY: Crown Business, 2012.

[ ] Cowen, Tyler, The Great Stagnation, NY: Dutton, 2011.

[ ] Cowen, Tyler, Average is Over, NY: Dutton, 2013.

[ ] Cross, Colin, The Fall;; of the British Empire 1918-1968, NY: Coward-McCann, Inc., 1968.

[ ] Durant, Will and Ariel, The Lessons of History, NY: Simon and Schuster, 1968.

[ ] Kennedy, Paul, The Rise and Fall of the Great Powers, NY: Random House, 1987.

[ ] Rt.Hon. David Owen, MP, Confidential Memo of British Embassy, Mar.31, 1979.

[ ] Patterson, James T. Grand Expectations: The U.S. 1945-74., Oxford U. Press, 1996.